The contract to build two Queen Elizabeth Class (QEC)
aircraft carriers was signed in July 2008 and is being delivered
by an Aircraft Carrier Alliance (ACA) consisting of MOD, BAE Systems,
Thales and Babcock Marine.

The baseline cost for building two carriers, pre-SDSR,
was reported in MPR10 as £5,900 million, excluding Assessment
Phase costs and including cost of capital. Removing cost of capital
and adding back Assessment Phase costs gives the MPR10 Capital
DEL baseline cost of £5,254 million. The agreed Final Target
Cost (FTC) position (post MPR10) is slightly lower at £5,241
million. Agreement of FTC is a key point in the QEC contract as
it sets the parameters against which the ACA's final cost performance
will be measured. These figures exclude any costs arising from
SDSR decisions on the Carrier programme.

The cost for building the first carrier only (HMS
QUEEN ELIZABETH) was assessed during SDSR as £4,275 million,
which was £979 million lower than the equivalent MPR10 baseline
for building two carriers (this equates to the roughly £1
billion saving explained at the Hearing). This was based on assessments
made by MOD cost engineers and an external consultancy team working
independently of the MOD project team. The savings represent cancellation
of approximately £1.3 billion worth of programmed expenditure
for the second Carrier (HMS PRINCE OF WALES), together with receipts
from the sale of surplus equipment, offset by some cost increases
due to, for example, loss of economies of scale on HMS QUEEN ELIZABETH
and additional VAT payments that become payable on expenditure
to date for the cancelled Carrier (VAT exemption only applies
to completed ships).

If we had decided to cancel both the Carriers and
immediately cease all build activity, the costs were assessed
during SDSR to be in the region of £3,156 million, or £2,098
million lower than the equivalent MPR10 baseline (this equates
to the roughly £2 billion saving explained at the Hearing).
This is based on internal MOD estimates. The savings represent
cancellation of approximately £2.8 billion worth of programmed
expenditure for both Carriers, together with receipts from the
sale of surplus equipment, which is then offset again by VAT payments
that become payable on project expenditure to date.

In terms of the carrier contract itself, therefore,
cancellation of either one or both carriers would have saved broadly
£1 billion or 2 billion in total respectively.

However, as the cancellation costs would have had
immediate effect, the costs in the short term would have
been significantly higher than proceeding with both carriers as
planned; nearly £1 billion more in Financial Year 11/12 if
both carriers had been cancelled.

In making its SDSR decisions on the carriers the
MOD also had to take into consideration the wider impact on the
UK warship industry. Put simply, if one or both of the carriers
were cancelled, and if the Government wished to retain a UK capability
for the design and manufacture of complex warships, then alternative
replacement work would need to be found. Or, the Government would
be faced with the costs of industrial rationalisation. These rationalisation
and redundancy liabilities pre-dated the carrier contract (and
the later Terms of Business Agreement) and arise from the mandated
Treasury Yellow Book costing rules.

Although often linked, it is important to stress
that the decision to build carriers has always been separate to
the decision to sustain a longer term UK warship building industry
that was the rationale behind the agreement to the TOBA.

The TOBA, signed in July 2009, provides MOD guarantees
to BAE Systems of a minimum level of ship build and support activity
of around £230 million/year. This level of work was independently
verified as the minimum level of work possible to sustain a credible
warship building industry in the UK. The TOBA has been designed
to incentivise major reductions in the size of the industrial
base on a managed basis to minimise the rationalisation cost for
which MOD was already liable under historical Yellow Book rules.

The TOBA can be cancelled at anytime. Cancellation
crystallises the extant rationalisation costs, leaving MOD liable
for remaining industry closure costs and compensation to BAE Systems
for their lost investment. During the SDSR, cancellation of the
TOBA would have been expected to cost in the order of £630
million. A key element of the TOBA is that it ensures that this
figure reduces year on year against an agreed formula and bounds
MOD's liabilities.

Related programmes

The financial impact on other related programmes
such as the Joint Strike Fighter (JSF), and Type 26 Global Combat
Ship (GCS) has also been excluded here, but was taken into account
in the decisions taken during SDSR.

QUESTION 141SENIOR
RESPONSIBLE OFFICERS

The Department has already stated, in response to
a Parliamentary Question, that determining whether there had been
a gap in succession of Senior Responsible Officer (or equivalent)
for all thirty projects in the MPR, some of which were initiated
many years ago, would incur disproportionate cost. We will provide
this information in response to the Committee's request, but it
will take some time to do so, and we aim to provide it by the
end of January 2011.

QUESTION 146DEPARTMENTAL
PRESS OFFICERS

The answer to the Parliamentary Question on press
officers, which was answered shortly after the hearing, was as
follows:

20 Dec 2010 : Column 986W

DEPARTMENTAL INFORMATION OFFICERS

Stephen Barclay: To ask
the Secretary of State for Defence how many press and communication
posts in his Department are remunerated at (a) between
£50,000 and £99,999 and (b) £100,000 or
over. [30400]

Mr Robathan[holding
answer 13 December 2010]: Our records indicate that in March
2010, 52 press and communication posts across Defence were remunerated
at between £50,000 and £99,999. These posts are across
the military and civilian defence community, in the UK and overseas
in Headquarters and in the single Service units.

A further 109 posts were filled by military ranks
or civilian grades for which the salary range straddled £50,000.
The range of salaries that these posts could have been paid is
between £45,190 and £56,078. It is not possible to say
how many of these individuals were paid more than £50,000.

20 Dec 2010 : Column 987W

There was one press and communications post remunerated
at £100,000 or over, which is a military two-star appointment.

We are taking a number of steps to reduce expenditure
on defence media and communications. This will include further
post reductions.

January 2011

Supplementary written evidence from the Ministry
of Defence

Question 136 - Note on the carrier procurement

The contract to build two Queen Elizabeth Class (QEC)
aircraft carriers was signed in July 2008 and is being delivered
by an Aircraft Carrier Alliance (ACA) consisting of MOD, BAE Systems,
Thales and Babcock Marine.

The baseline cost for building two carriers, pre-SDSR,
was reported in MPR10 as £5,900M, excluding Assessment Phase
costs and including cost of capital. Removing cost of capital
and adding back Assessment Phase costs gives the MPR10 Capital
DEL baseline cost of £5,254M. The agreed Final Target Cost
(FTC) position (post MPR10) is slightly lower at £5,241M.
Agreement of FTC is a key point in the QEC contract as it sets
the parameters against which the ACA's final cost performance
will be measured. These figures exclude any costs arising from
SDSR decisions on the Carrier programme.

The cost for building the first carrier only (HMS
QUEEN ELIZABETH) was assessed during SDSR as £4,275M, which
was £979M lower than the equivalent MPR10 baseline for building
two carriers (this equates to the roughly £1Bn saving explained
at the Hearing). This was based on assessments made by MOD cost
engineers and an external consultancy team working independently
of the MOD project team. The savings represent cancellation of
approximately £1.3Bn worth of programmed expenditure for
the second Carrier (HMS PRINCE OF WALES), together with receipts
from the sale of surplus equipment, offset by some cost increases
due to, for example, loss of economies of scale on HMS QUEEN ELIZABETH
and additional VAT payments that become payable on expenditure
to date for the cancelled Carrier (VAT exemption only applies
to completed ships).

If we had decided to cancel both the Carriers and
immediately cease all build activity, the costs were assessed
during SDSR to be in the region of £3,156M, or £2,098M
lower than the equivalent MPR10 baseline (this equates to the
roughly £2Bn saving explained at the Hearing). This is based
on internal MOD estimates. The savings represent cancellation
of approximately £2.8Bn worth of programmed expenditure for
both Carriers, together with receipts from the sale of surplus
equipment, which is then offset again by VAT payments that become
payable on project expenditure to date.

In terms of the carrier contract itself, therefore,
cancellation of either one or both carriers would have saved broadly
£1Bn or 2Bn in total respectively.

However, as the cancellation costs would have had
immediate effect, the costs in the short term would have
been significantly higher than proceeding with both carriers as
planned; nearly £1Bn more in Financial Year 11/12 if both
carriers had been cancelled.

In making its SDSR decisions on the carriers the
MOD also had to take into consideration the wider impact on the
UK warship industry. Put simply, if one or both of the carriers
were cancelled, and if the Government wished to retain a UK capability
for the design and manufacture of complex warships, then alternative
replacement work would need to be found. Or, the Government would
be faced with the costs of industrial rationalisation. These
rationalisation and redundancy liabilities pre-dated the carrier
contract (and the later Terms of Business Agreement) and arise
from the mandated Treasury Yellow Book costing rules.

Although often linked, it is important to stress
that the decision to build carriers has always been separate to
the decision to sustain a longer term UK warship building industry
that was the rationale behind the agreement to the TOBA.

The TOBA, signed in July 2009, provides MOD guarantees
to BAE Systems of a minimum level of ship build and support activity
of around £230M/year. This level of work was independently
verified as the minimum level of work possible to sustain a credible
warship building industry in the UK. The TOBA has been designed
to incentivise major reductions in the size of the industrial
base on a managed basis to minimise the rationalisation cost for
which MOD was already liable under historical Yellow Book rules.

The TOBA can be cancelled at anytime. Cancellation
crystallises the extant rationalisation costs, leaving MOD liable
for remaining industry closure costs and compensation to BAE Systems
for their lost investment. During the SDSR, cancellation of the
TOBA would have been expected to cost in the order of £630M.
A key element of the TOBA is that it ensures that this figure
reduces year on year against an agreed formula and bounds MOD's
liabilities.

Related programmes

The financial impact on other related programmes
such as the Joint Strike Fighter (JSF), and Type 26 Global Combat
Ship (GCS) has also been excluded here, but was taken into account
in the decisions taken during SDSR.

Question 141 - Senior Responsible Officers

The Department has already stated, in response to
a Parliamentary Question, that determining whether there had been
a gap in succession of Senior Responsible Officer (or equivalent)
for all thirty projects in the MPR, some of which were initiated
many years ago, would incur disproportionate cost. We will provide
this information in response to the Committee's request, but it
will take some time to do so, and we aim to provide it by the
end of January 2011.

Question 146 - Departmental Press Officers

The answer to the Parliamentary Question on press
officers, which was answered shortly after the hearing, was as
follows:

20 Dec 2010 : Column 986W

Departmental Information Officers

Stephen Barclay: To ask
the Secretary of State for Defence how many press and communication
posts in his Department are remunerated at (a) between
£50,000 and £99,999 and (b) £100,000 or
over. [30400]

Mr Robathan[holding
answer 13 December 2010]: Our records indicate that in March
2010, 52 press and communication posts across Defence were remunerated
at between £50,000 and £99,999. These posts are across
the military and civilian defence community, in the UK and overseas
in Headquarters and in the single Service units.

A further 109 posts were filled by military ranks
or civilian grades for which the salary range straddled £50,000.
The range of salaries that these posts could have been paid is
between £45,190 and £56,078. It is not possible to say
how many of these individuals were paid more than £50,000.

20 Dec 2010 : Column 987W

There was one press and communications post remunerated
at £100,000 or over, which is a military two-star appointment.

We are taking a number of steps to reduce expenditure
on defence media and communications. This will include further
post reductions.